Defined Benefit Pensions:

Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges

GAO-07-703: Published: Jun 28, 2007. Publicly Released: Jun 28, 2007.

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To protect workers' retirement security, the requesters asked GAO to assess: 1) What is known about conflicts of interest affecting private sector defined benefit (DB) plans? 2) What procedures does the Pension Benefit Guaranty Corporation (PBGC) have to identify and recover losses attributable to conflicts? 3) What procedures does Employee Benefits Security Administration (EBSA) have to detect conflicts among service providers and fiduciaries for PBGC-trusteed plans? 4) To what extent do EBSA, PBGC, and the Securities and Exchange Commission (SEC) coordinate their activities to investigate conflicts? GAO interviewed experts, including agency officials, attorneys, financial industry representatives, and academics, and GAO reviewed PBGC documentation and EBSA enforcement materials. GAO analyzed Labor, SEC, PBGC, and private sector data, including data on pensions, pension consultants, and rates of return data, and conducted statistical and econometric analyses.

A conflict of interest typically exists when someone in a position of trust, such as a pension consultant, has competing professional or personal interests. Though data are limited on the prevalence of conflicts involving plan fiduciaries and consultants, a 2005 SEC staff report examining 24 registered pension consultants identified 13 that failed to disclose significant conflicts. GAO's analysis found that, in 2006, these 13 consultants had over $4.5 trillion in U.S. assets under advisement. GAO also analyzed a sample of ongoing DB plans associated with the 13 consultants that, as of year-end 2004, had total assets of $183.5 billion and average assets of $155.3 million. Additional sample analysis showed that the DB plans using these 13 consultants had annual returns generally 1.3 percent lower than those that did not. Because many factors can affect returns, and data as well as modeling limitations limit the ability to generalize and interpret the results, this finding should not be considered as proof of causality between consultants and lower rates of return, although it suggests the importance of detecting the presence of conflicts among pension plans. Whether specific financial harm was caused by a conflict of interest is difficult to determine without a detailed audit. As a creditor and a trustee of terminated plans, PBGC's policies and procedures are oriented toward the likely recovery of assets, rather than explicitly focusing on losses associated with conflicts of interest involving service providers. Although PBGC has broad legal authority to recover losses attributable to conflicts of interest, PBGC officials told us that the agency limits its pursuit of cases to those in which the recovery will likely exceed the cost of bringing a case to court successfully. While monetary recoveries by PBGC may improve the agency's financial position, they generally have little effect on participant benefits because most affected participants already receive their full benefits promised by their plans. According to PBGC, more than 90 percent of all beneficiaries of PBGC trusteed plans received their full promised plan benefit. While EBSA's enforcement program is concerned with conflicts of interest affecting all private pension plans, it does not have specific procedures for plans trusteed or likely to be trusteed by PBGC. EBSA has recently initiated the Consultant/Advisor Project (CAP) to focus on conflicts among service providers, though it includes no specific focus on high risk or terminated plans. Moreover, existing law limits EBSA's efforts to pursue conflicts and redress for financial harm when certain service providers are either not fiduciaries under the Employee Retirement Income Security Act (ERISA) or did not knowingly act in concert with a fiduciary. Coordination among EBSA, PBGC, and the SEC on conflicts of interest is primarily informal, in part because of agencies' different responsibilities. The agencies' investigative activities for conflicts of interest tend to operate independently. Differences in agency missions pose challenges to the three agencies' developing a coordinated focus to pursue conflicts of interest affecting individual pension plans.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: With the "Conflicted Investment Advice Prohibition Act of 2009," HR 1988, introduced in April 2009, Congress seeks to amend ERISA in terms of more broadly defining from whom the Department of Labor would be allowed to recover certain plan losses. Specifically, the bill aims to broaden the definition of an "independent investment adviser" to include service providers even if they are not considered, fiduciaries.

    Matter: Congress may wish to consider amending the Employee Retirement Income Security Act to allow EBSA to recover plan losses against certain types of service providers even if they are not currently considered fiduciaries under ERISA.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On July 29, 2008, the Department of Labor's Employee Benefits Security Administration (EBSA) and the Securities and Exchange Commission entered into a Memorandum of Understanding (MOU) setting forth a framework for consultation and exchange of information. The MOU is designed to facilitate the ongoing consultation and communication between EBSA and the SEC concerning matters of mutual interest, including examination findings and trends, enforcement cases, and any other matters that the SEC and DOL staffs believe would be of interest to the other regulators in fulfilling their respective regulatory responsibilities. For example, it calls for facilitating the exchange of examination-related information concerning investment advisers or other firms of mutual interest to the SEC and the DOL. In addition, EBSA, PBGC and SEC met to determine if the three agencies should enter into a separate formal MOU. They determined that information sharing between SEC and PBGC was sufficient, as issues relating to individual cases were raised for follow-up, and there was no need for an additional MOU.

    Recommendation: Building on the existing memorandum of understanding (MOU) between EBSA and PBGC and a recommendation made in our earlier work, the Assistant Secretary of EBSA, the Director of the PBGC, and the Chairman of the SEC should enter into an MOU to facilitate information sharing on conflicts of interest among service providers that either consult or that provide money management services to PBGC-trusteed plans and those likely to terminate in the future.

    Agency Affected: Department of Labor

  2. Status: Closed - Implemented

    Comments: On July 29, 2008, the Department of Labor's Employee Benefits Security Administration (EBSA) and the Securities and Exchange Commission entered into a Memorandum of Understanding (MOU) setting forth a framework for consultation and exchange of information. The MOU is designed to facilitate the ongoing consultation and communication between EBSA and the SEC concerning matters of mutual interest, including examination findings and trends, enforcement cases, and any other matters that the SEC and DOL staffs believe would be of interest to the other regulators in fulfilling their respective regulatory responsibilities. For example, it calls for facilitating the exchange of examination-related information concerning investment advisers or other firms of mutual interest to the SEC and the DOL. In addition, EBSA, PBGC and SEC met to determine if the three agencies should enter into a separate formal MOU. They determined that information sharing between SEC and PBGC was sufficient, as issues relating to individual cases were raised for follow-up, and there was no need for an additional MOU.

    Recommendation: Building on the existing memorandum of understanding (MOU) between EBSA and PBGC and a recommendation made in our earlier work, the Assistant Secretary of EBSA, the Director of the PBGC, and the Chairman of the SEC should enter into an MOU to facilitate information sharing on conflicts of interest among service providers that either consult or that provide money management services to PBGC-trusteed plans and those likely to terminate in the future.

    Agency Affected: Pension Benefit Guaranty Corporation

  3. Status: Closed - Not Implemented

    Comments: The Employee Benefits Security Administration (EBSA) reported that the initial investigations opened under the Consultant/Advisor Project (CAP) were carefully targeted. EBSA reported that many were targeted as a result of the SEC's pension consultant review and because of the carefully structure and design of the CAP project itself. EBSA completed several investigations during this first phase of the project, which taught them the complexity of the financial relationships involved, the large volume of documentation required to be reviewed, and the investigative effort required. CAP will continue in FY 2009 as a national enforcement project, and the primary focus of the project will continue to be the receipt of indirect, undisclosed compensation by fiduciary pension consultants and other investment advisers. As EBSA continues to gain experience, it will consider expanding the project to include those high risk plans PBGC deems likely to terminate in the future and PBGC-trusted plans. EBSA will also continue to provide appropriate support to the PBGC as needed. EBSA continued the Consultant/Adviser Project (CAP) in FY 2011, and the focus remains the receipt of indirect compensation by fiduciary investment advisers and investment managers. At this time EBSA does not plan to shift the focus of CAP to high risk plans because CAP is carefully designed to target service providers rather than plans. Nevertheless, EBSA continues to provide appropriate support to the PBGC as needed.

    Recommendation: The Secretary of Labor should direct the Assistant Secretary for EBSA to enhance current enforcement by expanding the scope of the new CAP program to include some emphasis on service providers of those high risk plans PBGC deems likely to terminate in the future and plans PBGC-trusteed.

    Agency Affected: Department of Labor

  4. Status: Closed - Implemented

    Comments: PBGC began a pilot project to incorporate new processes into its procedures that would, among other things, identify concerns in trusted plans for follow-up. In May 2008, PBGC implemented a Risk Assessment for Fiduciary Breach and/or Conflict of Interest for Plan Asset Audit form that is completed for each trusted plan. The risk assessment is intended to determine early in the auditing life cycle whether there are potential conflicts of interest, fiduciary breaches, or fraud and includes instructions for conducting an enhanced plan asset audit and a new checklist to assess fiduciary breaches and conflicts of interest. Questionable activities or indicators of potential fiduciary breaches or conflicts of interest are coordinated with PBGC's Office of General Counsel and Office of Chief Counsel for further analysis and/or action.

    Recommendation: To enhance existing protections of plans and participants, and maintain participant and sponsor confidence in the private DB pension system, as part of its current risk assessment efforts, the Director of the PBGC should develop a pilot project to collect the necessary documents on a select group of trusteed plans to determine the extent to which conflicts of interest may have affected these plans. This pilot project should be undertaken with the assistance of EBSA and in consultation with the SEC. PBGC and EBSA should provide SEC with ideas that would be useful to them on the information SEC could gather during its adviser and broker-dealer examinations.

    Agency Affected: Pension Benefit Guaranty Corporation

  5. Status: Closed - Implemented

    Comments: On July 29, 2008, the Department of Labor's Employee Benefits Security Administration (EBSA) and the Securities and Exchange Commission entered into a Memorandum of Understanding (MOU) setting forth a framework for consultation and exchange of information. The MOU is designed to facilitate the ongoing consultation and communication between EBSA and the SEC concerning matters of mutual interest, including examination findings and trends, enforcement cases, and any other matters that the SEC and DOL staffs believe would be of interest to the other regulators in fulfilling their respective regulatory responsibilities. For example, it calls for facilitating the exchange of examination-related information concerning investment advisers or other firms of mutual interest to the SEC and the DOL. In addition, EBSA, PBGC and SEC met to determine if the three agencies should enter into a separate formal MOU. They determined that information sharing between SEC and PBGC was sufficient, as issues relating to individual cases were raised for follow-up, and there was no need for an additional MOU.

    Recommendation: Building on the existing memorandum of understanding (MOU) between EBSA and PBGC and a recommendation made in our earlier work, the Assistant Secretary of EBSA, the Director of the PBGC, and the Chairman of the SEC should enter into an MOU to facilitate information sharing on conflicts of interest among service providers that either consult or that provide money management services to PBGC-trusteed plans and those likely to terminate in the future.

    Agency Affected: Department of Labor: Employee Benefits Security Administration

 

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